What Is a ‘Circuit Breaker’ and How Can It Mitigate Flash Crash Risks?
A circuit breaker is a temporary trading halt or restriction imposed by an exchange when market volatility exceeds a predefined threshold. Its purpose is to pause trading, allow the market to cool down, and prevent panic selling or cascading liquidations from spiraling out of control.
By halting or slowing down trading, it gives the exchange time to manage risk and allows traders to post additional margin, thereby mitigating flash crash risks.
Glossar
Circuit Breakers
Intervention ⎊ Circuit breakers, within cryptocurrency and derivatives markets, represent pre-defined mechanisms to temporarily halt trading during periods of substantial and rapid price declines or increases.
Flash Crash
Phenomenon ⎊ A flash crash is a market phenomenon characterized by an extremely rapid, deep, and short-lived decline in the price of a cryptocurrency or derivative contract.